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Long term wealth creation needs bear markets

The recent recovery in market prices, might signal hope, however historical experience has taught us that bear markets can continue for much longer. What’s important is the need to take this period as an opportunity to build future wealth, rather than letting fear take over.

A bear market in equity is said to have started when prices correct more than 20% from the nearest market peak. Clearly, we have been in bear market territory for a few weeks now. 

The Nifty 50 is currently around 28% lower than its peak in January 2020 and last month had fallen nearly 40% from this peak. The recent recovery in market prices might signal hope, however, historical experience has taught us that bear markets can continue for much longer. What’s important is the need to take this period as an opportunity to build future wealth, rather than letting fear take over.

The benefit of buying low

 If you only invest when the market rallies, each successive purchase will happen at a higher price; hence, incremental returns will be lower. When markets correct you get to buy the same asset or the same mutual fund scheme or the same stock at a lower price. Buying the same quality at a lower price is likely to bump up your future return. 

Sample this: in the bear market of the year 2000, the NAV or daily price of a fund launched in September 2000 was slightly over Rs 10, this fell to Rs 6.95 by October 2001.

This happened because the launch of the fund coincided with the period of the correction. However, by March 2002, the price was back up to Rs 8.5. Had investors redeemed in fear after the initial fall or not continued to invest through the downturn, they would have lost out. The price of this fund today is around Rs 70. 

The same story repeated in the 2008 bear market. Sample this: A Large Cap Fund was launch in April 2008 at a NAV of Rs 10, just before the 2008 correction extended itself. A year later, the price was at around Rs 6.9, down 30%. In the next 6 months, the price nearly doubled to Rs 13.

The absolute gain since launch is 30% but from the lows, it is much more. The current NAV of the scheme is Rs 40. Hence, investors need to keep adding through a period of a downturn to take advantage of lower market levels too. 

Waiting for the bottom?

The opportunity to invest will continue throughout the bear phase. Trying to figure out the bottom, however, is futile. Have a look at the chart below. This is what the bear market of 2008 looked like. 


When a correction starts it causes fear, investors are tempted to withdraw or stop their regular investments till they see a turnaround. By mid-July 2008, the equity market benchmark index had corrected 40%. At this point one may think, the bottom is near and invest a lump sum.

The market bottom is known only in hindsight by looking back, hence there is little sense in waiting for it. You have to keep up regular investments throughout the bear phase. 

Look at the chart below. 



The market did not bottom out till October 2008 and recovery in sustainable prices started only by March 2009. The market bottom is known only in hindsight by looking back, hence there is little sense in waiting for it. You have to keep up regular investments throughout the bear phase. 

Market corrections and bear phases happen due to many different reasons, and similarly, recoveries too have their own reasons. Investors must take advantage of the lower prices and keep adding in small quantities to their existing allocation to equity.   

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